Spotify is a streaming music service that gives listeners free and legal access to millions of tracks via their desktop client.  It’s a service that has proved popular amongst early adopters and is already changing the way that many people access music.

photo by bungalowbrian

For a few years now ‘ad supported’ have been the big buzz words within the digital music industry and many new companies that are using recorded music have their business model based on the fact that they will become very popular and then ‘sell the attention’ of their users to advertisers. This is not a bad business model and for TV and commercial radio this is very sustainable and has been for many years.

The problem is at the moment that the online advertising market is not as developed as the more traditional markets which essentially means that advertisers do not spend enough money online to actually sustain all the new businesses that are starting up. One other thing to keep in mind is that licensing recorded music is a very expensive business and one has to sell a lot of ads to get a profit out of it.

Now we might have something called ‘recession’. Even though it’s impossible to predict what is going to happen next year it now looks like the online ad market might not be growing as much as hoped, in fact it might be getting smaller as big brands cut back on their marketing spending. If you run an online music service right now it might be very tricky for you to make enough money through advertising next year. This makes me think that a lot of businesses might be looking at subscriptions again and to see if this is a better model for them to be able to pay the rent next month.

What we have to keep in mind is that advertising and subscriptions have been the two big income sources for the media sector for many years and just because the medium is going digital this is not going to change. Often media owners combine the two (I have to pay for my magazine subscription and will see ads in there) and this will continue to happen online.

The ‘freemium’ model (where the service is free but you have to pay for extras) seems to be successful for some companies like Flickr whereby others might be focusing on subscription only services. If you know who your audience is that this can make a lot of sense. Looking at the new Soundcloud service for example you can see that they want to focus on professional music makers only and see them as their customers (even though they have a free service too).

I have the feeling that the (potentially) tough advertising market next year will make companies think twice about who they want as their paying customers: advertisers or their users.